The Extractive Industries Transparency Initiative

Climate change is no longer an issue of the future. It is here and is staring at us as we witnessed the catastrophic effects of Hurricane Harvey that descended upon Houston, Texas, causing damage estimated at US$90 billion and a death toll of at least 70. The cost of rebuilding is estimated at double this amount. In the Caribbean islands of Barbuda, St. Martin, the Dominican Republic and Haiti, Puerto Rico, and Cuba, the extent of devastation is beyond belief, as Hurricane Irma is about to make landfall in Miami. The estimated damage so far is US$10 billion (excluding the Dominican Republic and Cuba) and the death toll so far is at least 22. A third major hurricane Jose is also currently making its way towards the Caribbean while the effects of Hurricane Katia are already being experienced in the Gulf of Mexico. To compound matters in the region, Mexico has recently experienced its worst earthquake in a century with a magnitude of 8.1 on the Richter scale. So far, 65 persons have been reported killed.

These events, and others elsewhere, must be a cause for countries all over the world to reflect on the adequacy of their efforts to combat climate change. There is no doubt that the greatest contributor to climate change is the use of fossil fuels and coal to generate electricity. Countries need to accelerate their efforts to phase out, if not eliminate altogether, the use of these two sources of energy and replace them with clean renewable ones, such as those derived from hydropower, wind, solar and other sources. It may be more cost-effective to do so, considering (i) the significant reduction in the cost of generating electricity from renewable sources, attributable mainly to the marked reduction in the cost of batteries that are used to store electricity; and (ii) the untold damage caused by climate change activities and the massive reconstruction efforts to bring the areas affected to a state of normalcy,

The Yasuni National Park in Ecuador is designated a UNESCO Biosphere Reserve. In 2007, Ecuador had decided to forego the exploitation of an estimated 846 million barrels of crude oil beneath the Park in exchange for US$3.6 billion in compensation from developed countries over a 17-year period. In doing so, Ecuador would not only avoid the release of 400 million tons of carbon dioxide into the atmosphere but also protect the area that is one of the most biodiverse places on earth. (In Guyana, the latest estimate of the discovery of oil reserves is 2.75 billion barrels of oil equivalents which means that, if fully exploited, an estimated 1.3 billion of carbon dioxide will be released into the atmosphere.) Unfortunately, after six years, international pledges amounted to only US$200 million, forcing Ecuador to commence drilling operations in 2016.

Over in Europe, France will be passing legislation later in the year to phase out all oil and gas exploration and production by 2040, thereby becoming the first country to do so. France is also committed to being carbon neutral by 2050 and to end the sale of gasoline and diesel vehicles by 2040. It also plans to stop generating electricity from coal and to reduce nuclear energy generation from 75% to 50% by 2022.

Now for today’s article. Last week, we began a discussion of the compliance requirements before a country is accepted to the membership of the Extractive Industries Transparency Initiative (EITI). These requirements are set out in the 2016 EITI Standard and fall into the eight categories, the first of which – Oversight by the Multi-Stakeholder Group (MSG) – has already been touched on. Today, we continue with that discussion.

Oversight by the MSG cont’d

The MSG is a partnership arrangement involving government, industry and civil society. As such the decision-making process must be all-inclusive throughout implementation, including the right to table an issue for discussion; the publication of the procedures for nominating and changing MSG representatives; and the frequency of meetings. There should also be sufficient advance notice of meetings and timely circulation of documents prior to their debate and proposed adoption. Adequate written records must also be maintained of discussions and decisions taken. Where the MSG has a system of per diems for attending EITI meetings or other payments to MSG members, this practice should be transparent and should not create conflicts of interest.

The MSG is required to maintain a work plan, fully costed and aligned with the reporting and validation of deadlines established by the EITI Board. The work plan must set EITI implementation objectives that are linked to the EITI Principles and reflect national priorities for the extractive industries. The MSG is encouraged to explore innovative approaches to extending EITI implementation to increase the comprehensiveness of EITI reporting and public understanding of revenues and to ensure high standards of transparency and accountability in public life, government operations and in business.

Legal and institutional framework, including allocation of contracts and licences

The Standard requires the disclosure of information about the rules and how the extractive sector is managed. This information enables stakeholders to understand the laws and procedures for the award of exploration and production rights, the legal, regulatory and contractual framework that apply to the extractive sector, and the responsibilities of the State in managing the sector. Where licences are awarded through a bidding process, the government must disclose the list of applicants and the bid criteria. Public disclosure of contracts and licences, including the terms and conditions attached to the exploitation of oil, gas and minerals, is also encouraged.

Implementing countries must maintain a publicly available register with timely and comprehensive information on licences issued. They are also encouraged to maintain a publicly available register of the beneficial owners of the corporate entities that bid for, operate or invest in extractive assets, including the identities of their beneficial owners, the level of ownership and details about how ownership or control is exerted.

Exploration and production

The Standard provides for implementing countries to disclose information on exploration and production activities as well as the basis of calculation, to enable stakeholders to understand the potential of the sector. They are required to provide an overview of the extractive industries, including any significant exploration activities. In terms of production, they must disclose production data for the fiscal year under review, including total production volumes and the value of production by commodity, and, when relevant, by state/region.

Implementing countries must also disclose export data for the fiscal year, including total export volumes and the value of exports by commodity, and, where relevant, by state/region of origin. This could include sources of the export data and information on how the export volumes and values disclosed have been calculated.

Revenue collection

The Standard requires a comprehensive reconciliation of company payments and government revenues from the extractive industries, including: (i) comprehensive disclosure of taxes and revenues; (ii) sale of the state’s share of production or other revenues collected in kind; (iii) infrastructure provisions and barter arrangements; (iv) transportation revenues; (iv) state-owned enterprises (SOEs) transactions; (v) subnational payments; and (vi) level of disaggregation. The MSG must agree which payments and revenues are material and therefore must be disclosed.

Revenue streams that need to be disclosed include: (i) government’s production entitlement (such as profit oil); (ii) national SOEs production entitlement; (iii) profits taxes (iv) royalties (v) dividends; (vi) bonuses, such as signature, discovery and production bonuses; (vii) licence fees, rental fees, entry fees and other considerations for licences and/or concessions; and (viii) any other significant payments and material benefit to government.

Revenue allocation

The Standard provides for the disclosures of information on revenue allocations to enable stakeholders to understand how revenues are recorded in the national and where applicable, subnational budgets. This includes: (i) distribution of revenues whether cash or in-kind in the national budget; (ii) subnational transfers; and (iii) revenue management and expenditures. Implementing countries must provide a disclosure of a description of the distribution of revenues from the extractive industries and indicate which extractive industry revenues, whether cash or in kind, are recorded in the national budget.

Social and economic spending

The Standard requires disclosures of information on social expenditures and the impact of the extractive sector on the economy, thereby helping stakeholders to assess whether the extractive sector is achieving the desirable social and economic impacts and outcomes. This includes: (i) social expenditures by companies; (iii) SOE quasi-fiscal expenditures; and (iii) an overview of the contribution of the extractive sector to the economy in terms of percentage of Gross Domestic Product as well as an estimate of informal sector activity, including but not necessarily limited to artisanal and small-scale mining. Other disclosures include:

(a) total government revenues generated by the extractive industries (including taxes,royalties, bonuses, fees, and other payments) in absolute terms and as a percentage of total government revenues;

(b) exports from the extractive industries in absolute terms and as a percentage of total exports;

(c) employment in the extractive industries in absolute terms and as a percentage of the total employment; and

(d) key regions/areas where production is concentrated.

Outcomes and impacts

Regular disclosure of extractive industry data is of little practical use without public awareness, understanding of what the figures mean, and public debate about how resource revenues can be used effectively. The MSG must ensure that the EITI Report is comprehensible, actively promoted, publicly accessible and contributes to public debate. Key audiences should include government, parliamentarians, civil society, companies and the media. The MSG is required to produce paper copies of the EITI Report, and ensure that they are widely distributed.

The MSG must review the outcomes and impact of EITI implementation on natural resource governance in its published annual progress reports. Civil society groups and industry involved in the EITI, particularly, but not only those serving on the MSG, should be able to provide feedback on the EITI process and have their views reflected in the annual progress report.